EUR/USD is posting a mild recovery on Friday, trading at the 1.1535 area at the time of writing, but remains at a short distance from the two-week lows at 1.1500. Weaker-than-expected Eurozone and German preliminary business activity data have disappointed investors, weighing on the common currency’s recovery,
The Eurozone HCOB Manufacturing Purchasing Managers’ Index (PMI) fell into contraction levels, to a 49.7 reading in November, from 50.0 in October, against market expectations of an improvement, to 50.2. The Services PMI eased to 52.4, undershooting expectations of a steady 52.5 reading.
Likewise, German Manufacturing activity has shown a deeper contraction in November, with a decline to 48.4 from October’s 49.6, while services activity eased to 52.7 from 54.6, well below market expectations of a 53.9 reading.
The US Dollar (USD), on the other hand, has maintained a firm tone through the week, as investors came to terms wth the fact that the US Federal Reserve (Fed) might take some time before easing its monetary policy further. The minutes of October’s FOMC meeting revealed a wide divergence among policymakers, and the long-awaited Nonfarm Payrolls (NFP) data for September have failed to shed further light on the outcome of the Fed’s December meeting.
Later today, European Central Bank officials, Luis de Guindos, Joachim Nagel, and José Luis Escrivá will take the stage. In the US session, the S&P Global preliminary PMIs and November’s Michigan Consumer Sentiment Index, together with a slew of Fed officials, will provide the fundamental guidance for the USD.
Daily digest market movers: Euro recovery loses steam
- US Dollar downside attempts remain limited, with investors paring back expectations of a Fed rate cut in December, while the Euro’s recovery attempt is suffering a significant setback, following German and Eurozone’s disappointing business activity figures.
- Earlier in the day, ECB President Christine Lagarde affirmed that Euro strength might bring down inflation further than expected, and that the bank will remain vigilant, ready to adjust its monetary policy if needed.
- In the US, S&P Global preliminary Manufacturing PMI is expected to have slowed to 52.0 in November from 52.5 in October, while the Services PMI is expected to remain steady at a 54.8 rate.
- Later on the day, the Michigan Consumer Sentiment Index is expected to show a moderate improvement, to 50.5 in November from last month’s 50.3 reading. Consumer Inflation Expectations for the next 12 months are seen at 4.7% and at 3.6% in the next five years, in both cases, unchanged from October.
- On Thursday, US Nonfarm Payrolls data beat expectations with a 119K net increase in employment in September, well above the 50K gain consensus. August’s reading was revised down to 4K net loss from the previously estimated 22K increase. The Unemployment Rate, however, unexpectedly rose to 4.4% from 4.3% in the previous month, which curbed market enthusiasm about the data release.
- In the Eurozone, the European Commission’s preliminary Consumer Confidence Index remained steady at -14.2 in November, against expectations of a moderate improvement to -14.0.
Technical Analysis: EUR/USD remains vulnerable below 1.1550
The EUR/USD has bounced from two-week lows at the 1.1500 area but remains trading within Thursday’s range, with 1.1550 likely to challenge bulls. Technical indicators are trending higher on the 4-hour chart, but the Relative Strength Index (RSI) remains below the key 50 level, which suggests that the recovery attempt remains frail.
The pair should breach Thursday’s high at the mentioned 1.1550 level, to gather momentum, and shift the focus to the November 18 and 19 highs in the area of 1.1600 and to the top of a descending channel from the mid-October highs, which is now around 1.1625.
However, failure to break 1.1550 might increase bears’ confidence to retest the 1.1500 psychological level, focusing on the November 5 lows, near 1.1470, and the mentioned channel support, around 1.1425.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.
EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.
The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control.
Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.
A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall.
Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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